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The Military's New Retirement System

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AAFMAA Team

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Military Benefits

Financial Planning & Investment

Military Retirement

2016-11-23

Many AAFMAA members have asked us about the “new” retirement system, which was approved by Congress in the 2016 National Defense Authorization Act. This is the first major change in military retirement since World War II and its impact is significant and important for the military and the nation.

This article explains the changes to the retirement system. It will apply to all individuals who join the military on 1 January 2018 or later. Those who joined the military between 2006 and 2017 will have the option of “opting in” to the new retirement system or staying with their current retirement system. Those who have already retired or those who entered the service before 2006 will have no change to their retirement.

Currently, military retirees receive a pension only after completing 20 years of service. That pension starts at 50 percent of salary at 20 years, increasing to 75 percent after 30 years. This retirement system is similar to other defined benefit plans from the 1950s that rewarded only those who stayed at a company for a career. The current system provides nothing to those who stay less than 20 years, is not what workers want today, and has become increasingly expensive.

The new military retirement system, which starts in 2018, has three basic parts. First, it adds a “defined contribution” component, similar to a 401k in the private sector. It starts with an automatic contribution by the military of 1 percent of a servicemember’s base pay in their personal Thrift Savings Plan account. The servicemember can also contribute a percentage of his or her base pay, which the military will match up to 5 percent. After serving two years, soldiers, Marines, sailors, airmen, and Coast Guardsmen can take those savings, with the matching contribution, to their next job. Second, to retain experienced officers and noncommissioned officers, the new plan provides a continuation pay “bonus” at 12 years of service of at least 2.5 months of pay for those who commit to serve an additional 4 years. Third, the new plan reduces the pension paid to retirees after 20 years of service by 20 percent. This reduced pension over the lifetime of the retiree achieves the cost savings to permit the first two parts of the plan. The plan will be mandatory for those who join the military in 2018 and beyond. Those currently serving are grandfathered under the old plan, but those with less than 12 years of service can choose the new plan.

This new retirement system was adopted because it is more consistent with how the millennial generation thinks about employment. Few young workers today expect to stay with the same organization for a career, but they want an employer who rewards them for saving for retirement. This new plan enables that and, unlike the current system, vests after just two years. As a result, even those who serve only a few years will have retirement funds. It will require increased financial responsibility by military members, which is where advice and counsel from AAFMAA can help. The new plan includes financial education so that military families can wisely invest their retirement savings, continuation bonuses, and pension funds to meet their current and long-term financial needs. If properly managed, a military family could accumulate more total funds under the new system with significantly greater flexibility and more personal control of their money.

From a national perspective, this new retirement system not only helps recruit and retain a better military, but can save money. Although exact savings depend on participation rates and other details, the plan could save $2 billion per year. This program represents a first step in limiting the increasing cost of military personnel compensation. Although the military has fewer people today than at any time since World War II, total military personnel costs are 25 percent higher than they were in 2000, after accounting for inflation. By reasonably reforming military compensation, the United States can continue to have the best military in the world and be in a better position to afford it.

Finally, this program provides an example of bipartisan entitlement reform that works. This change to the retirement system started in 2011 with a radical proposal by the Defense Business Board, which would not have worked, but started people thinking about the problem. Pentagon leaders and Congress examined the issue and established the Military Compensation and Retirement Modernization Commission (MCRMC), with a distinguished group of commissioners and staff. After significant input and study, the MCRMC presented a balanced, reasonable proposal, and it became the basis for the change in the retirement system.

The military has taken the lead on reforming military retirement, providing a model for other parts of government to follow with additional entitlement reform. The problems are significant, but not insurmountable. As the military demonstrated in its retirement reform, other parts of government may follow with a bi-partisan, comprehensive approach that grandfathers current beneficiaries, but modernizes entitlements and saves money over the long run.